An Apparel About Face?

In yesterday’s Goldman Guide we made a top ten list of market thoughts that included the need to start looking for potential turn around stocks from 2014, possibly in tech or consumer discretionary.

There were plenty of potential candidates from our Market Monitor picks for this year, but one consumer discretionary stock stood out from the crowd even in the fickle apparel sector.

We featured Cherokee, Inc. (NASDAQ – CHKE - $17.59) in early August. The stock is not a total loser, and in fact is up just over 1% since our initial feature. With that said, we think that the measly 1% is not enough.

Right on queue we mentioned that apparel in general could have good uptick if we get an early winter. Well, unfortunately, it’s here!   Cherokee has some brands and products that could meet increased demand. The Company markets, manages, and licenses fashion and lifestyle brands that it owns or represents for apparel, footwear, home, and accessories worldwide. The Company owns Cherokee, Sideout, Liz Lange, Sideout Sport, Carole Little, Saint Tropez-West, Chorus Line, All That Jazz, Uniform, Completely Me by Liz Lange, Tony Hawk, Hawk, and other brands. It also assists other brand-owners, companies, wholesalers, and retailers in identifying opportunities as a licensee or licensor for their brands or stores.

One item we emphasized in the Guide was looking for EPS rebounds. The Company beat estimates for FY14Q4 by nearly 200%, FY15Q1 by nearly 75%, and missed by just a penny for FY15Q2. The Company is expected to bring in $1.10 per share for FY15, up 35% from FY14. This puts the forward 12-month P/E under 15, a few points under the trailing 12-month P/E currently near 18.

Additionally, the Company has had an outstanding streak of expanding existing brands both through acquisition and organic growth. Recently, the Company announced three new partnerships for its ále by Alessandra Brand that include Oxford Ophthalmic, Physician Endorsed and Esquire Footwear, that will debut lines of hats, totes and casual footwear, Oxford Ophthalmic’s eyewear, and resort, spa, and cruise line collections with products designed for golf, tennis, yachting and sailing clubs.

With an impressive operating margin of 47% versus the industry average of 4%, and over $4 million in cash on hand, Cherokee is poised to maximize future ventures given this efficiency. We think 2015 expansion lead to a great 2015 for CHKE. Look for a price of just over $22.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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